Sequestration threatens many Maryland businesses

Economists say effects of substantial budget cuts will be felt not just by government contractors, but other businesses as well

If federal sequestration occurs in January and substantial budget cuts kick in, the effects will be felt on not just government contractors but businesses throughout Maryland, economists say.

Such a situation is extremely difficult to plan for, said executives with local contractors.

“It takes a lot of time to plan for the uncertainty,” said Judy Stephenson, president of Gaithersburg software training company Officepro, which gets some 80 percent of its business from federal contracts. “How do you plan for something that might not happen? It's very frustrating.”

The federal Budget Control Act of 2011 detailed initial cost reductions of almost $1 trillion during the next decade designed to help offset debt ceiling increases of as much as $2.1 trillion. Further cuts could push the total well above $1 trillion. A bipartisan congressional “super committee” authorized to specify where the reductions will come from failed to do so last year, and across-the-board cuts will begin Jan. 2 if Congress does not change the plan by then.

In a memo to employees this week, Robert Stevens, CEO of Bethesda military and aerospace contracting giant Lockheed Martin, and Lockheed President Chris Kubasik wrote that the company will not issue notices about impending layoffs related to sequestration this year. The Department of Defense does not anticipate any “contract actions” on Jan. 2 and “any action to adjust funding levels on contracts as a result of sequestration would likely not occur for several months” after Jan. 2, the executives said.

“We remain firm in our conviction that the automatic and across-the-board budget reductions under sequestration are ineffective and inefficient public policy that will weaken our civil government operations, damage our national security and adversely impact our industry,” Stevens and Kubasik wrote. “We will continue to work with leaders in our government to stop sequestration and find more thoughtful, balanced and effective solutions to our nation's challenges.”

The National Institutes of Health in Bethesda will face an 8.2 percent budget reduction, or a cut of about $2.5 billion, according to a recent report from the federal Office of Management and Budget. NIH Director Francis Collins testified to a Senate subcommittee this year that the cuts would mean the agency would have to reduce the number of grants it awards to subcontractors by about 2,300 next fiscal year.

The U.S. economy could return to a recession if all the budget reductions kick in and major tax cuts scheduled to expire at the end of the year are not extended, Economic Policy Institute researchers Josh Bivens and Andrew Fieldhouse said in a recent report. They recommended repealing the automatic sequestration spending cuts, along with boosting unemployment insurance and infrastructure spending.

Analyst: Not likely anything done until after elections

It is unlikely that anything will be done about the so-called “fiscal cliff” until after the Nov. 6 elections, said Daraius Irani, director of the Regional Economic Studies Institute's applied economics and human services group at Towson University. “It will really impact Maryland since there are so many federal workers and contractors here,” he said.

Maryland had about 145,000 federal workers in August, some 5.6 percent of its total workforce. Federal workers constitute about 2 percent of the national workforce.

The budget cuts could have a ripple effect on many other industries, including small businesses, Al Wurglitz, principal at law firm Miles & Stockbridge, said in a recent meeting of the Montgomery County Chamber of Commerce's Small Business Committee. The impact would extend to areas such as leasing commercial real estate, the retail and service industries, and state and local governments, according to a chamber summary of the meeting.

The meeting was particularly an eye-opener for some small businesses that do not have federal contracts, said Stephenson, vice chairwoman of the chamber's Small Business Committee.

“There is a ripple effect,” she said. “It will not just impact government contractors.”

Many of Officepro's federal agency clients are not making decisions on contracts for next year until the budget situation is resolved, Stephenson said.

“This is not really anything too new to us,” she said. “That is fairly standard anyway. But this is more uncertain.”

Contractors already have made cuts in staffing and other areas in previous years, Stephenson said.

“Most are pretty lean already,” she said.

Her company has six full-time employees and works with about 20 contractors.

“We will be unable to utilize [the contractors if sequestration occurs],” Stephenson said.

Innovative Business Interiors of Silver Spring, which provides commercial furniture, has federal subcontracts occasionally, but nothing is currently in jeopardy, said company President Charles Atwell. The situation comes at a difficult time for many employers that are still recovering from the Great Recession, he said.

“It adds to the lack of stability,” said Atwell, co-chairman of the chamber's Small Business Committee.